Extraordinary challengers

Along with the update to its forecast, the IMF also released a new assessment of global financial conditions in its Global Financial Stability Report (GFSR).

It said that financial markets had rebounded since the lows of last March, the result of improving economic conditions and wide-ranging policy actions by governments.

"Notwithstanding the recent sell-off, risk appetite has returned, equity markets have improved, and capital markets have reopened," said Jose Vinals, director of the IMF's Monetary and Capital Markets Department.

But policymakers still face extraordinary challenges as they seek to unwind the unprecedented fiscal, monetary and financial support they provided to keep their economies and financial markets from collapsing, the GFSR pointed out.

The IMF said the varying paces of recovery across countries called for a differentiated response in the unwinding of measures used to stimulate the economy and combat the crisis.

"For the moment, the recovery is very much based on policy decisions and policy actions," said IMF Chief Economist Olivier Blanchard in an IMF video interview. "The question is when private demand will come and take over. Right now it's OK, but a year down the line, it will be a big question."

IMF Managing Director Dominique Strauss-Kahn has warned that countries risk a return to recession if anti-crisis measures are withdrawn too soon.

Due to the still-fragile nature of the recovery, fiscal policies need to remain supportive of economic activity in the near term and the fiscal stimulus planned for 2010 should be implemented fully, said the IMF.

However, given growing concern about fiscal sustainability, countries should also make progress in devising and communicating exit strategies, it warned.